-
Fourth Circuit Affirms Dismissal Of Suit Against Online Education Platform
12/13/2022On November 22, 2022, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal of a putative class action against an online education platform (the “Company”) under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. Boykin v. K12, Inc., No. 21-2351, 2022 WL 17097453 (4th Cir. 2022). Plaintiffs alleged that the Company artificially inflated the cost of its shares by misrepresenting the state of its business during the COVID-19 pandemic. The district court found that plaintiffs failed to plead falsity and scienter and granted the Company’s motion to dismiss with prejudice. The Fourth Circuit affirmed, holding that plaintiffs failed to allege actionable misrepresentations or facts giving rise to a strong inference of scienter.
Plaintiffs alleged that the Company misrepresented that it was “position[ed] . . . well given how the education market [was] likely to change” because of its technological “core competency,” “expertise” and “flexibility” in providing online learning services. Plaintiffs also alleged that the Company made misrepresentations relating to a reported deal with a Florida school district (the “School District”) when it stated that it would “provide customized services, including curriculum, assessment tools, teacher training and data management” to the School District. According to plaintiffs, this was allegedly misleading because a contract was never actually signed due to the Company’s services falling “below the expectations [the School District] set.”
The Fourth Circuit held that most of the alleged misrepresentations were non-actionable puffery, opinion statements or forward-looking statements. Specifically, the Court held that the Company’s statements regarding its “core competency” in online learning reflected “the kind of general positivity” investors would not rely on, further noting that “it is not actionable for a company to give positive descriptions of what it reasonably believes to be its strengths.” Such statements also amounted to non-actionable opinions, according to the Court, because the Company consistently used the language “we believe” when describing its competency. The Court found that the Company’s statement that it was well-positioned during the pandemic was about the Company’s future economic performance and thus a non-actionable forward-looking statement protected by the PSLRA safe harbor. The Court also rejected plaintiffs’ claim that the Company misled investors into believing that it had a fully executed contract with the School District. While the Court acknowledged the Company’s statement about its partnership with the School District “was imprecise, plaintiffs nowhere allege that [the Company] . . . ever attested unambiguously to having a signed agreement.”
Finally, the Court held that plaintiffs did not plead facts giving rise to a strong inference of scienter. Specifically, the Court noted that plaintiffs did not allege “‘suspicious’ insider selling or other kinds of self-dealing” nor did they “suggest that [the Company’s executives] would personally benefit from a special bonus or an impending performance review.” According to the Court, plaintiffs’ “theory that defendants would undermine their long-term credibility—and risk considerable bad press—just to pump up [the Company’s] share price for a few months is unpersuasive.”
